The much-discussed Finance Bill 2020/21 is set to bring a lot of changes to the pensions industry but now the UK taxman will benefit as well.
The bill has introduced the concept of a financial institution notice (Fin), as an addition to HM Revenue and Customs’ (HMRC) existing formal information powers.
This will allow HMRC to issue notices to banks and other financial institutions placing them under a legal obligation to provide documents or information about a particular taxpayer.
The UK tax collector will be able to do this without the taxpayer’s agreement or the approval of the tax tribunal, which is the case under the existing rules.
Safeguards
Hugh Gunson, legal director of private wealth disputes at Charles Russell Speechlys, said: “There are various safeguards, including that, in HMRC’s reasonable opinion, the production of the documents or information is not onerous.
“Generally, a taxpayer must be notified of a Fin, together with the reasons for it, although HMRC can apply to the tax tribunal to dispense with this requirement if to do so might prejudice the assessment of tax.
“A number of the existing safeguards in the information notice regime also apply to Fins, including importantly that they cannot require the production of legally privileged material.
“The Fin is a powerful new weapon for HMRC in tax enquiries and investigations.
“Financial institutions and taxpayers alike should be prepared for HMRC to deploy these with increasing regularity – and when faced with one they should ensure they are fully aware of their legal obligations.”
Cross-border
The purpose of the changes is to speed up HMRC’s information-gathering process, in particular where the UK taxman is complying with information requests from other jurisdictions under tax treaties and conventions.
The draft legislation says that financial institutions can “expect to see a sharp increase” in HMRC notices once these rules come into force.
Gunson added that the “territorial scope of Fins” will be something to keep an eye on in the future.
“In recent cases, it has been held that HMRC can issue both notices direct to taxpayers and third-party notices outside the jurisdiction,” he said. “We might similarly expect HMRC to seek to issue Fins to non-UK financial institutions.
“Arguably this cuts across the existing network of tax treaties and conventions for the cross-border exchange of information; and there may also be issues to consider around local laws.
“Developments in this area will be worth watching.”
‘Nudge letters’
Elsewhere in the tax sector, HMRC has sent out a batch of ‘nudge letters’ to people suspected of having undisclosed offshore assets, as it bolsters crackdown to fund covid-19 debt.
The UK taxman is looking to narrow the tax gap which currently stands at over £31bn ($40.4bn, €34.4bn).
Recepients have been told to complete a certificate sent with the letters to disclose offshore assets within 30 days of receiving the notice.
Opportunity to review
The letter said: “We have compared the information we have received with your tax record and tax return(s).
“We believe that you may not have paid the right amount of UK tax. There may be a reasonable explanation for this.
“We are giving you the opportunity to review your tax affairs and to tell us about anything that you may need to put right. Some people with assets overseas have found that earlier tax advice is out of date after changes to their personal circumstances or to tax laws.
“Please help us to make sure the information we hold about your tax affairs is accurate. You can do this by checking that you have told us about all of your UK tax liabilities from all overseas income or gains.”
Criminal proceedings
Recipients of the letters have been told to seek advice before completing the certificate provided as errors could lead to criminal proceedings.
Dawn Register, partner in tax dispute resolution at BDO, said: “We are not surprised that HMRC is focussing resources on clamping down on undeclared offshore assets, a recent OECD study shows there is plenty of money in the ‘offshore money tree’, which HMRC will continue to shake to raise much-needed revenue.
“HMRC runs bank data through its sophisticated computer system called Connect and also has algorithms linked to the foreign pages of UK tax returns. Individuals receiving these letters probably have a mismatch of the account data compared to their tax return filings.
“This does not necessarily mean something is wrong. However, individuals need to be on ‘red alert’ regarding their response to HMRC on this issue, especially regarding the wording of the HMRC certificate. If anything is proven to be wrong with their tax affairs after signing certificates, there is a risk of criminal prosecution.
“These certificates do not include any time restriction and therefore technically could require corrections of any tax errors going back 20 years. Expert advice is therefore essential.
“Anyone who has received a nudge letter should also be aware that even if their offshore affairs are up to scratch, HMRC’s greater knowledge of their financial affairs could lead to questions about where wealth has emanated from and if there are wider UK tax issues.”
